BACKGROUND: For the fiscal year ending January 31, 2012, Target’s EBIT was $5,32
ID: 3145226 • Letter: B
Question
BACKGROUND: For the fiscal year ending January 31, 2012, Target’s EBIT was $5,322,* and its tax rate was 34.3 percent. Its short-term borrowings were $3,786, and its long-term debt was $13,697. In addition, the firm’s book value of equity was $15,821.
Earlier, you were provided with the information necessary to estimate Target’s operating profit (EBIT) after-tax, also known as NOPAT; invested capital (the book value of equity plus interest-bearing debt); cost of capital; and market value of equity.
Based on this information, 1. Estimate Target’s EVA for the year that ended on January 31, 2012. 2. Was Target adding value? 3. Did Target have a positive market value added or MVA? 4. How did Target’s EVA and MVA compare with Walmart’s EVA and MVA?
Explanation / Answer
EVA = NOPAT Invested Capital x cost of capital
5322 *(1 0.343) (15821 + 3786 + 13697)*cost of capital
The Cost of capital is weighted average of cost of equity and cost of debt, which are not mentioned in the posted question.
Target would be adding value if EVA > 0
MVA, on the other hand, is simply the difference between the current total market value of a company and the capital contributed by investors (including both shareholders and bondholders).
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.